Economic Anguish: Consumers Run for Cover

Feb. 12, 2008— -- Foreclosures are up. Job growth has flatlined. And the stock market has taken investors on a wild roller roaster ride.

So are we going through a rough patch or has a recession arrived?

Economists are split on the issue, but it appears that everyday Americans are clearly feeling the pinch and have lost confidence in the economy.

A weekly consumer confidence poll by ABC News showed the second-steepest fall in its 22-year record. The only other time the index fell this far, this fast was in October 1990 as the 1990-1991 recession gathered steam.

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Consumer confidence surveys such as the one by ABC News are seen by several economists as an accurate predictor of a recession. The catch is nobody agrees on when exactly that recession starts, if at all. Most economists are still split on whether recent, discouraging economic data necessarily mean a recession is unfolding.

"The difference between a weak economy and a recession is a loss of confidence," said Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc. "When consumers lose faith in the economy they pull back on their spending, inducing businesses to cut back on jobs, which further undermines confidence. It's a self-reaffirming negative cycle that characterizes a recession."

Zandi said that generally when there is a sharp decline in confidence, it signals recession.

So are we in a recession now?

"I think the economy is contracting," Zandi said. "I think all the dynamics suggest it will continue to contract and there will be a recession, but that is still a forecast."

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Mark Montgomery, a professor of economics at Grinnell College in Iowa, said that when people begin to feel less wealthy because their assets are declining in value or they anticipate being laid off soon, then they're going to be less inclined to spend.

"Lower spending of course is one of the elements that can trigger recession," Montgomery said.

Still, Montgomery said that the economy "is certainly not [in] a loud, clear, deep recession at this point."

Silvia Ardagna, an assistant professor of economics at Harvard University, said that declines in consumer confidence and other leading economic indicators, such as unemployment and manufacturing orders, do signal a recession.

"Whether you technically define this as a recession or not, the slowdown is very significant," she said.

Hashem Dezhbakhsh, the chairman of the economics department at Emory University in Atlanta, said a reluctance to spend by consumers would have "a substantial effect on the GDP."

But Dezhbakhsh said it was also possible that the economy was headed for a "soft landing" -- a slowdown that doesn't result in a recession.

"The growth rate for the last quarter was not negative -- it was smaller, but it was not negative," he said. "It's possible to have several quarters of very low growth and then after that you'd go back to a higher growth rate period."

While the 1990-1991 recession was caused by troubles in corporate America, today's economic downturn is being driven by troubles in housing.

"Housing is one basis for people's wealth -- when housing prices fall, people feel less wealthy and people who feel less wealthy are likely to spend less," Montgomery said.

Policymakers in Washington have taken note. The Federal Reserve has cut a key interest rate five times since August, part of its efforts to stimulate the economy.

"When the Fed lowers interest rates, it's partly trying to increase investment and spending. It's also trying to buoy people's confidence … [the Fed is trying to] signal its willingness to forestall a recession, to risk inflation to forestall a recession," Montgomery said.

He noted that some steps by government leaders -- if successful -- could stop the economy from slipping into a recession.

Washington lawmakers and President Bush are also providing checks of $600 to individuals and $1,200 to couples to stimulate spending.

And today Treasury Secretary Henry Paulson announced a new program by six private banks that would let qualifying homeowners forestall foreclosure proceedings for 30 days.

What Is a Recession?

The "official" group that determines when a recession begins and ends is a committee of the National Bureau of Economic Research called the Business Cycle Dating Committee. Seven academic economists are currently serving on the committee.

The group's definition of a recession is a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales."

The widely held maxim of "two quarters of negative growth" is not a requirement for a recession, but that is often the easiest attribute to see when a recession occurs.

Falling wages are not always a part of a recession, and in fact inflation-adjusted income has not fallen substantially during five of the past nine recessions. This was true during the most recent recession in 2001, when fast growth in productivity and declines in the prices of imports, especially oil, raised purchasing power while employment was falling.

It has been almost seven years since the last U.S. recession, which was from March 2001 to November 2001. Previous recessions occurred from July 1990 to March 1991 and July 1981 to November 1982.

We don't often know that a recession is taking place until several months after the economy has taken a turn for the worse. The real signals are "pronounced, pervasive and persistent" job loss, negative GDP growth and a reduction in commercial-consumer trade.

A Jan. 7 memo released by the NBER said the committee "isn't interested in being the first to call a recession. It's interested in being accurate and definitive." So, don't expect an official designation until after the recession is well under way. These folks are charged with putting bookends on the event, not in predicting it.

The NBER waits until the data to show whether or not a decline is large enough to qualify as a recession before declaring whether a turning point in the economy is a true peak marking the onset of a recession.

With reporting from Daniel Arnall